Teva’s CEO Vigodman history; sudden departure calls for fearless successor

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The News:

Teva Pharmaceutical Industries Ltd. (Petach Tikva ISR) suddenly found itself without a permanent CEO on Tuesday (February 7, 2017) after Erez Vigodman stepped down, leaving new management to restore confidence in the world’s biggest generic drugmaker after a series of missteps.

@TevaPharm found itself without a permanent #CEO after Erez Vigodman stepped down Click To Tweet

A string of costly acquisitions, along with delayed drug launches, have sent Teva shares plummeting and led to calls for management and structural changes, including a possible split into separate generic and branded medicine units, according to Reuters.

Teva, Israel’s largest company, said late on Monday (February 6, 2017) that Vigodman was departing immediately and would be replaced on an interim basis by Chairman Yitzhak Peterburg.

Investors say Teva, which faces pricing pressure in its core generics business and recently lost patent protection on its key branded drug Copaxone for multiple sclerosis, must choose a new CEO with extensive pharmaceutical experience.

The new boss needs to set a clear strategy, said Eldad Tamir, head of investment house Tamir Fishman, whose funds have cut their holdings in Teva by 90% in the past two years.

“Is it the biggest generics company or is there an understanding that generics is hitting a glass ceiling and it should do other stuff such as investing more in branded drugs?” Tamir told Reuters.

Teva’s bad run continued on Tuesday, when the company said it was being investigated in Israel over the same issues that led to a $519 million US bribery settlement in December over criminal and civil allegations that it bribed overseas officials to gain business.

Compounding the challenge for Teva, US President Donald Trump has pledged to crack down on drug prices and a number of shareholders are pushing Teva to split into separate branded and generic companies.

Vigodman, 57, was hired in 2014 to replace CEO Jeremy Levine, who lasted less than two years at the job before leaving amid disagreements with the board, according to the Times of Israel. The company’s shares have dropped some 40% in the past 12 months. They close down 6% for the week at $32.38 Wednesday in New York trading.

Teva said that in accordance with Israeli law, Peterburg has stepped down from his role as chairman so he can serve as the interim CEO. Teva’s board of directors “is undertaking a search to identify a permanent chief executive officer with the assistance of a search firm,” it said in a statement.

Peterburg said the company would focus on “realizing the cost synergies and strategic benefits of the Actavis Generics acquisition,” and that he would conduct a “thorough review of the business,” according to the statement.

Investors and analysts are concerned that the company, in which almost every household in Israel has a stake through pensions and savings plans, is zigzagging ineffectively in its efforts to find an alternative to its blockbuster proprietary multiple sclerosis drug Copaxone, which is being threatened by competition as its patents expire.

Vigodman, considered a wunderkind of the Israeli industry who led Teva’s share price to its August 2015 high, came under fire for taking the company on what has turned out to be an expensive acquisition spree, in an effort to maintain its edge in the generics market and generate an alternative to Copaxone revenues.

“The new CEO of Teva will face a daunting task,” said Gilad Alper, head of foreign equity research at Excellence Nessuah Ltd., an Israeli investment bank. “The company can no longer afford significant acquisitions and the fate of Copaxone will continue to be decided by US courts and by the FDA (US Food and Drug Administration) and is essentially beyond the control of Teva.”

Bernstein analyst Ronny Gal, in a video to clients, called Peterburg “a good caretaker CEO, but clearly not a candidate to run the company long term”.

Prior to rejoining Teva’s board of directors in 2012, Peterburg led the company’s research and development efforts as head of global branded products, from 2010 until October 2011.

Steve’s Take:

Running a Pharma company in 2017, like running marathons in the dead of winter, is not for the faint hearted or habitual couch potato. And for those of us crazy enough to embark on a 26-miler knows, the first 18-20 are usually fairly comfortable. It’s always those last few….

After a horrendous 2016 and dreadful start to 2017 for Teva, the company’s CEO is heading for the sidelines; dropping out of the race; throwing in the towel, permanently.

The move, announced late Monday, and reported by FiercePharma, comes as the result of a “mutual agreement” between Erez Vigodman and Teva’s board, the drugmaker said. Teva Chairman Yitzhak Peterburg will take up the reins as interim CEO while Teva works with a search firm to tap a permanent replacement. Director and Celgene veteran Sol Barer will serve as chairman.

Vigodman’s departure follows several months of tumult at the Israeli pharma. Last year, it faced lengthy delays to its $40.5 billion buy of Allergan’s generics unit, about which investors and observers weren’t all that sanguine to begin with. Then, Teva’s acquisition of Mexico’s Rimsa went so askew that Rimsa’s founders sued the company. In December, generics CEO Siggi Olafsson–a big supporter of the Allergan deal–unexpectedly bailed out.

A brutal price backdrop that almost reached the cruel stage sewed it up. For many, seeing 2016 come to an end was a welcome relief. Welcome 2017, was the expectant cheer.

For Teva, however, 2017 hasn’t been an improvement. To the contrary, so far this year Teva has already dialed back its 2017 sales guidance by more than $1 billion, citing launches that hadn’t gone as planned. Inherited pay-for-delay penalties have taken their toll, and late last month, a court flung out four patents on long-acting multiple sclerosis star Copaxone, placing billions of dollars at risk.

When a CEO like Vigodman abruptly steps down after just three years running the show, it’s usually more likely his successor won’t be showered with bouquets of flowers. Instead, he (or she) more likely will be ducking brickbats.

Teva can’t afford to wait for a permanent new leader to start making changes, says Bloomberg. Peterburg said in a statement that the entire business will get a thorough review. The company’s generous dividend should be one of the things on the chopping block.

Teva’s massive debt load is comprised largely of the necessary funding for acquiring Allergan’s generics business. Many think the deal was steep at $40.5 billion for a slow-growing generics business.

Meanwhile, Copaxone’s expected regression will leave a mark. The drug accounts for about a fifth of Teva’s sales and more of its profit, Bloomberg points out. Nothing in the company’s branded-drug pipeline looks likely to take up the slack.

In reality, there just aren’t many alternatives nowadays to right the ship.

A Bloomberg Intelligence analysis recently found Teva could get close to its debt-repayment targets without dipping into its cash till, even with rising competition from Copaxone generics. But that analysis rests on Teva hitting the midpoint of its guidance. That’s a risky assumption for a company that is integrating a big acquisition, losing both its CEO and generics-business head, and “has repeatedly been overly-optimistic with its forecasts.”

There’s substantial risk that worse-than-expected Copaxone losses or continued generic struggles will force Teva to push out its deleveraging target, dip into its $1.5 billion cash pile, or both. Investors in the company’s debt are already skittish; its $3.5 billion in bonds maturing in 2026 are trading at their lowest level since issuance.

Meanwhile, Teva is paying out a handsome dividend. For 2016, like other recent years, the dividend was $1.36, representing a year-end yield of 3.45%.

Chucking the dividend or substantially scaling it back would set the table for Teva’s return to a reasonable leverage ratio quicker. It will also give a new head honcho more flexibility to find an encore for Copaxone. A healthier balance sheet, Bloomberg points out, would also make another talked-about move–splitting Teva into separate branded and generics businesses—that much simpler.

While investors haven’t enjoyed the roller coaster–in October, shares hit a two-year low, FiercePharma notes, and they’ve only gone south from there–“we believe that more investors will be uneasy with the uncertainty of an unexpected and abrupt CEO departure,” Wells Fargo analyst David Maris wrote in a note to clients.

Evercore ISI analyst Umer Raffat has already heard feedback to that effect. “On average, investor reaction has been neutral to slightly negative,” he wrote in his own note Tuesday morning.

One influential shareholder who may not be too broken up over the change is activist Benny Landa, who has lobbied for years for more pharma experience on Teva’s board.

“What was obvious to me in the past is now clear: the most suitable CEO is someone with a strong background in global pharma–ideally, a person who has managed a pharma company or was in a very senior position in a pharma company,” he told Israeli newspaper Globes.

Steve's Take: New @TevaPharm #CEO will need to make hard changes, such as cutting dividend Click To Tweet

At Teva, this latest wunderkind of a new CEO had better have speed, endurance and the ability to keep running. Especially during those last few miles, even though the finish line keeps getting moved further back, and he (or she) feels like their legs got lopped off a while ago. Just ask Mr. Vigodman.

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